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© 2005 UMFK.

DLJdirect

internet business models

text and cases

Donatas Sumyla

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© 2005 UMFK.

Content

• Overview of the company;

• Goals & strategies;

• Competitors;

• Primary stakeholders;

• GBF;

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© 2005 UMFK.

Overview of the Company

• DLJdirect is an online brokerage company;• Blake Darcy is the CEO;• Trade 4% of online brokerage trades;• High profile deals led by DLJ include

Fleet’s $16 billion acquisition of BankBoston, Olivetti’s $65 billion hostile takeover of Telecom Italia, TCI’s $69 billion merger with AT&T;

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Some history

• Donaldson, Lufkin & Jenrette, Inc. was founded in 1959;

• Initially a boutique investment bank known for outstanding institutional equity research;

• Went public in 1995;• At year-end 1998 DLJ was 72% owned by

French insurance giant AXA;

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Goals & Strategies

• The goal was to attract affluent, self-directed investors who would value access to DLJ’s equity research and to IPOs underwritten by the parent company’s investment bank.

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? Over company’s goals

Such customers were highly profitable, yet Darcy wondered if this target market was too narrow. Was the company forfeiting opportunity by not aggressively pursuing day traders and/or less affluent mainstream investors?

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Earlier Strategies

• DLJ pursued an aggressive strategy to break into the “bulge bracket” of leading Wall Street firms during 1990s.

• Also accelerated the expansion of its investment banking ad trading operations into international markets;

• During the second half of the 1990s, DLJ’s Banking Group continued to serve smaller companies in need of high-margin equity and debt financing and merger advice, but gradually broadened its client base to include larger corporations.

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Earlier Strategies

• These strategies resulted in:– Significant growth in revenues, profitability,

and shareholder value;– For fiscal 1998, the company’s net revenues

were $4.0 billion and net profits were $370 million;

– By mid-1999, the market value of the firm’s equity was worth nearly $9 billion;

– As of June 1999, DLJ was ranked #1 underwriter of U.S. high-yield debt issues.

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Pershing Division

• In 1977, DLJ, Inc. diversified into securities clearing business through the acquisition of Pershing & Co.

• Clearing agents provided a range of trading and “back office” processing services that allowed their clients to complete customers’ transactions;

• By year-end 1998, Pershing served over 550 correspondents with a total of 2.5 million customers and account balances of $ 279 billion;

• It was a significant profit generator for DLJ;

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Entering the Online Brokerage Business

• Prodigy was a mass market online service created during mid-1980s by a joint venture between IBM and Sears;

• Prodigy’s managers decided to offer an exclusive online discount brokerage service and approached established brokerage companies for help in creating the service;

• Nobody was interested, except Pershing;

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Entering the Online Brokerage Business

• Why Pershing?:– It was consistent with its entrepreneurial

corporate culture;– Every year the division launched a few new

businesses to serve the rapidly evolving needs of its correspondents;

– Pershing had successfully confronted channel conflicts before;

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Entering the Online Brokerage Business

• The new venture was named PC Financial Network, avoiding an obvious brand affiliation with either Pershing or DLJ;

• The management could experiment with business strategy;

• PCFN offered discounted commission rates;• Had minimal marketing and customer acquisition

costs;• Relied on e-mails to existing Prodigy customers;

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Entering the Online Brokerage Business

• Despite PCFN success, the new unit struggled inside Pershing to secure resources to build the data processing systems required to support its growth;

• Management decided to abandon the Prodigy exclusivity model and pursue a multiple-channel distribution strategy instead (partnership with AOL).

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PCFN becomes DLJdirect

• PCFN was pressured by competitors’ lower commission rates;

• Another source of pressure came from its parent company;

• If PCFN to became DLJdirect, they would have the access to the parent company’s research and to IPOs underwritten by its investment bank;

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DLJdirect

• DLJdirect’s management decided to lower its commission rates to $20;

• Temporary revenue slippage in 1997, but by 1998 commission revenues increased by 55% over 1997, active accounts grew by 46%, and total transaction volumes rose by 84%;

• The next challenge:– How to respond to its competitors’ marketing

campaigns?– Darcy felt that DLJdirect had to increase its

commitment to marketing and customer acquisition efforts in order to prevent further market share erosion;

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DLJdirect

• DLJdirect lacked its competitors’ spending power;• Options:

– Sell its online brokerage business, and let someone else fund its growth;

– It could be separated completely from the parent company through a spin-off or the parent could retain management control and partial equity ownership of the online brokerage through a separately valued tracking stock;

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DLJdirect

• After weighing all the concerns, DLJ management decided to proceed with a tracking stock IPO, with DLJ, Inc. retaining 84% of DLJdirect’s equity;

• The tracking stock was issued in May 1999 at $20, valuing the online unit at $2 billion;

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Online Brokerage Industry

• Mostly technologically-savvy, aggressive investors;

• Held multiple accounts with different brokerages;• A tremendous growth in the online brokerage

business was based on few factors:– Falling computer prices;– Development of faster modems that made timely online

trading possible;– Growing acceptance of the Internet as a legitimate

channel for retail purchases;– Financial services were well suited for the Internet;

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Customer segmentation

• Retirement by the Book (RBB)– Moderate risk tolerance, looking to invest for a

comfortable retirement;– Interested in reliable trade execution, user-friendly

interfaces, and variety of financial offerings;

• Portfolio Cruise Control (PCC)– Average total assets of over $350,000;– Most wealthy and oldest customer segment;– The most important feature was advice and quality

information;

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Customer segmentation

• Aggresively Affluent (AA)– The most common segment among Internet investors in the late

1990s;– High-net worth individuals who traded more than 10 times a year;– AAs sought timely execution and low trading commission fees,

and typically were willing to pay a modest premium for consistent high-quality service;

• Get Rich Fast (GFF)– “Day traders”;– The most visible clients of online brokers;– Young individuals with modest net worth;– Made frequent, small trades in the hopes of accumulated gains

related to minute-by-minute fluctuations in stock prices;

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Competitors

• Schwab;• E*Trade;• Fidelity;• Merrill Lynch;• Datek;• Schwab and E*Trade were dominant competitors in the

online brokerage industry. Spending heavily on marketing and customer acquisition. Result: strong brands, controlled over 40% of the market between them (1999).

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DLJdirect’s Operations

• Customer focus;

• Web site and client offerings;

• Marketing strategy;

• Clearing and customer service operations;

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Customer focus

• Focused on customer acquisition efforts;• Targeted self-directed, sophisticated online

investors, who on average have higher account balances than other investors;

• Specifically sought customers in the “Aggressively Affluent” segment; they were more likely to buy large blocks of stock, trade of margin, and own a diverse array of financial investments;

• Many of them were customers of DLJdirect’s competitors, seeking to move to a higher end online broker;

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Web site and client offerings• Web site contained the full range of information and transactional

services that online investors had come to expect from the industry;• The site offered free access to news feeds and stock quotes and

portfolio tracking services that provided alerts when share prices moved outside of a specified range;

• The only brokerage firm to offer new customers the ability to apply online and begin trading immediately without forwarding cash to cover initial investment;

• DLJdirect’s customers who maintained asset balances in excess of $100,000 had access to DLJ research;

• DLJdirect provided tiered service levels for accounts with high asset balances;

• DLJdirect was ranked near the top of the industry in terms of speed of execution;

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Marketing strategy

• Pursued high end customers with a variety of marketing slogans;

• In 1997 $13 million spent on marketing – 19% of total revenue;

• 1998 increased marketing budget to $25 million;• In 1999 DLJdirect planned to spend $65 million

on marketing;• 30% of the budget was spent online, including

$12.5 million per year for a two year distribution deal with AOL that featured DLJdirect as one of four online brokers within AOL’s proprietary service;

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Clearing and customer service operations

• DLJdirect had a partnership with Pershing;• It was beneficial because it reduced the need to invest in

technical support, personnel, and infrastructure;• It also benefited from order flow rebates from Pershing;• On the other hand this relationship was costly; DLJdirect

was the only major online brokerage that didn’t clear its own trades;

• Customer service was critical to company’s high end customers;

• Telephone support was provided 24/7, free of charge;

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Primary Stakeholders

• Customers;

• Businesses;

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GBF

• Network effects– Medium to Strong;

– They were focusing on client exclusivity;

• Economies of scale– Strong;

– Costs are fixed;

• Customer retention rates– “Stickiness” is important;

– High CR rates;

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Success or Failure?

• A big question mark ?.

• It depends on many factors:– Marketing strategy;– Network effects implementation;– Customer retention rates;

• Latest update: – DLJdirect as acquired by TD Waterhouse. The

web site is no longer available;

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Questions???